garlandwhizzer wrote:I totally agree with a 100% equity position for those less than 50 who have a stock market stomach. Considering long term returns it is the way to go in my opinion.

The first part of your post (above)....

garlandwhizzer wrote:Wise investors, there are some, not many, Warren Buffet and Ben Graham come to mind, actually profit greatly from bear markets by buying precisely when the emotionally overwrought herd is panicking and rushing to sell, believing that the sky is falling. That is one reason, perhaps the main reason, that they hold bonds in their portfolios, to rebalance into stocks at propitious moments and take advantage of emotion driven market inefficiencies. As the saying goes, you make your money in bear markets. You just don't realize it at the time.

.... is contradicted to heck with the second part of your post. In order to"profit greatly from bear markets by buying precisely when the emotionally overwrought herd is panicking and rushing to sell, believing that the sky is falling" and/or otherwise plainly rebalance Asset Classes, is to have diversity in them.

Additionally, "long term" returns (history, sayonara!) have no predictive value in future return. I guess it shouldn't be surprising to read the many statements from some posters - right in this thread and similar other threads - as if to suggest otherwise.

Not everyone needs or wants a 100% equity position - whether they can stick with it or not. I'm no fan of FI in an era of financial repression but I am a fan of portfolio efficiency, variance reduction in the name of CAGR, etc. That's part of the reason I'm such a fan of 'The Larry'. Anyhow, [forum member] Akiva made the following statement in a recent thread and is exactly my same thought on the [high equity allocation] matter so I can't see any reason to try and say it differently:

increasing your variance to increase arithmetic return does not always help your CAGR as much as you'd think. In terms of CAGR, you are accepting a lot of extra volatility for only a slightly higher gain. You should be sure that this is what you want.... People are often more aggressive than they have to be.

stemikger wrote:On a side note, Dave Ramsey (who is certainly not in the category of any of the men mentioned above) also recommends 100% stock portfolio. However, he also recommends managed funds in four different categories.

On another side note, Bert and Ernie of Sesame Street also recommend a 100% stock portfolio. The also recommend stocks in the entertainment industry.

letsgobobby wrote:and why would you exclude the oh so interesting data from 1901 to 1926?You know, where the market went basically nowhere?

Though we surely can't definitively rely on the 1926- data, you probably already know why 1926 is the starting point used by modern finance -- and that rather than data mining he was just using the data he had (kind of suggesting that more "mining" might be warranted if one insists on using past data to definitively describe the future).

I might suggest a comparison (growth chart) of VBIAX and VTSAX from the start of the latest secular bear market (2000) to date. Regrettably, Vanguard's comparison goes back only ten years. Morningstar allows you to go back to 2000.

The results from 2000 are what one might expect. VBIAX did better.

It's all about your investing horizon. A person 40 years old in 2000 who was plunking serious retirement money into 100% stocks (VTSAX) would have done better as to those funds with a balanced (60/40) approach (VBIAX). Fast-forward to 2003, after the carnage of 2002. A person plunking serious money starting in 2003 would have fared better in VTSAX (you can see this in the Vanguard growth chart comparison).

I do not dispute that growth comparisons can be cherry-picked to support whatever thesis one posits.

letsgobobby wrote:and why would you exclude the oh so interesting data from 1901 to 1926?You know, where the market went basically nowhere?

Though we surely can't definitively rely on the 1926- data, you probably already know why 1926 is the starting point used by modern finance -- and that rather than data mining he was just using the data he had (kind of suggesting that more "mining" might be warranted if one insists on using past data to definitively describe the future).

yes, I am aware - but isn't it convenient that the punishing 1900-1920 bear market is conveniently left out of all the 'reliable data?'

Not to mention all the many stock markets of the world which have effectively returned zero - or worse - in the last century. Argentina, Greece, Peru, Columbia, South Africa, New Zealand, Spain, Belgium, Portugal - all according to Bill Bernstein in The Four Pillars of Investing.

Sure my eyes grow wide at 140% gains in 4 years, and I salivate a little with my 60/40 blend. But I could also survive a 90% market decline that never recovered; it wouldn't be pretty, but we'd make it. I wouldn't survive that if I were 100% stocks.

That's not true. Why would it be true? Most disaccumulation models do not have much worse outcomes at 100% stocks than at some blend of stocks and bonds. The opposite statement that if one needs ongoing income you need stocks is somewhat true as those same models usually show that too much in bonds is dangerous.

William Bernstein's Retirement Calculator from Hell seems to show what dbr mentions. Using an inflation-adjusted withdrawal shows a worse outcome by having too much in bonds:

And even without an inflation-adjusted withdrawal, just a straight percentage, bonds didn't seem to help much. In fact, the most notable thing is that as time goes on and markets rebounded, having lots of bonds produced a worse outcome:

dbr wrote:Most disaccumulation models do not have much worse outcomes at 100% stocks than at some blend of stocks and bonds.

Depends what you mean by "much." To me, the big thing is that IF you choose your failure rate FIRST, and make it the sort of reasonably low number most people want when the actually think about it, the real take-home is how little difference asset allocation actually makes either way. Nevertheless, go to Vanguard's Retirement Nest Egg Calculator and plug in a 4% withdrawal rate, set it to 60% stocks, 40% bonds and get this (results actually vary slightly from run to run, it is apparently a real live Monte Carlo simulator):

Plug in 100% stocks and get this:

I personally would call that a "much worse outcome."

Vanguard gives a capsule summary of their methodology. It is what it is. The funny thing is that when I post results like this, the typical response is "it must be wrong, because it's not what I expected."

Of course, if you want a 100% stocks portfolio to do better, you can get that result--just up the withdrawal rate to something unrealistic.

letsgobobby wrote:yes, I am aware - but isn't it convenient that the punishing 1900-1920 bear market is conveniently left out of all the 'reliable data?'

Not to mention all the many stock markets of the world which have effectively returned zero - or worse - in the last century. Argentina, Greece, Peru, Columbia, South Africa, New Zealand, Spain, Belgium, Portugal - all according to Bill Bernstein in The Four Pillars of Investing.

Though it could have been intentionally deceptive, my impression has been that the original compilers of the data were doing the best they could with what they had (one reason that "treasure trove" room anecdote is appealing).

I have no such defense for how the financial industry has chosen to use, and misuse, the data since ...

Vanguard gives a capsule summary of their methodology. It is what it is. The funny thing is that when I post results like this, the typical response is "it must be wrong, because it's not what I expected."

Of course, if you want a 100% stocks portfolio to do better, you can get that result--just up the withdrawal rate to something unrealistic.

The Vanguard Retirement Nest Egg Calculator to which Nisi refers is a good tool, not a perfect one for divining the future. Its assumed future bond performance is based on past performance of high quality bond indexes dating back to the 1920s or so. During that time the average bond yield was much higher than today's bond market, by a factor of about 300%. Should one expect the bond market to perform the same way going forward from today's historically low interest rates as it has done over the past 90 years, especially in view of the fact that the last 31 years have been the greatest bull market in bonds in US history? I don't think so. The best estimate of what bond returns will provide going forward is the current yield. With TIPS that yield GUARANTEES the bond holder a loss in real purchasing power for all short and intermediate term holdings. Treasuries currently yield less than inflation as well and, unlike TIPS, have no inflation protection going forward. In short, in real inflation adjusted dollars, expected returns of the highest quality bonds over the next decade are zero or less. Nice as the Retirement Nest Egg Calculator looks, I personally don't trust it to be the flawless oracle of the future.

That's not true. Why would it be true? Most disaccumulation models do not have much worse outcomes at 100% stocks than at some blend of stocks and bonds. The opposite statement that if one needs ongoing income you need stocks is somewhat true as those same models usually show that too much in bonds is dangerous.

William Bernstein's Retirement Calculator from Hell seems to show what dbr mentions. Using an inflation-adjusted withdrawal shows a worse outcome by having too much in bonds:

And even without an inflation-adjusted withdrawal, just a straight percentage, bonds didn't seem to help much. In fact, the most notable thing is that as time goes on and markets rebounded, having lots of bonds produced a worse outcome:

Bob

Harold,

Thanks for that. I sort of recanted my statement in a recent post. That being said, I still do/suggest and will continue to use balanced portfolios in the de-cumulation phase. Call it psychological or whatever, but when stocks go down, that is one thing. When you have to sell them when they are down, that "paper" loss becomes real. With high-quality bonds in the fold, you can admit that those are not the prices you will have to sell at and therefore don't necessarily apply to you (higher bond prices do, as those are what you will be selling so long as stocks are down to generate income).

Also, a minor point on 100% stocks and the agony of losing money or not having anything to sell to rebalance at lower prices. (a) we heard from a rather vocal group a few days ago that in severe market sell-offs, they weren't going to rebalance anyway, and (b) most people under 50 are still diligently saving $ and in many cases their ongoing contributions represent a sizable percentage of their wealth -- so they absolutely are able to take advantage of lower prices. Now, DCAing into a balance portfolio usually means some of the $ is wasted on stable bonds who usually don't present you with an opportunity to buy "below average".

dbr wrote:Most disaccumulation models do not have much worse outcomes at 100% stocks than at some blend of stocks and bonds.

Depends what you mean by "much." To me, the big thing is that IF you choose your failure rate FIRST, and make it the sort of reasonably low number most people want when the actually think about it, the real take-home is how little difference asset allocation actually makes either way. Nevertheless, go to Vanguard's Retirement Nest Egg Calculator and plug in a 4% withdrawal rate, set it to 60% stocks, 40% bonds and get this (results actually vary slightly from run to run, it is apparently a real live Monte Carlo simulator):

Plug in 100% stocks and get this:

I personally would call that a "much worse outcome."

Vanguard gives a capsule summary of their methodology. It is what it is. The funny thing is that when I post results like this, the typical response is "it must be wrong, because it's not what I expected."

Of course, if you want a 100% stocks portfolio to do better, you can get that result--just up the withdrawal rate to something unrealistic.

The simulator clearly makes the assumption that there is no relationship from one year to the next, which I have to disagree with. It reality we tend to get the best stock return years after the worse years and vice versa...

Vanguard gives a capsule summary of their methodology. It is what it is. The funny thing is that when I post results like this, the typical response is "it must be wrong, because it's not what I expected."

Of course, if you want a 100% stocks portfolio to do better, you can get that result--just up the withdrawal rate to something unrealistic.

Well, my actual comment was an objection to the idea that if you need income, you have to have bonds. I read that as the old "income = what interest your bonds pay out" fallacy, which is a sure way to push my buttons and was very strange as a statement to come from EDN as he seems to be pretty astute in most of what he is posting.

The actual model that you are quoting is pretty much the general outcome of about all studies of the subject that show that 100% stocks is not quite as safe at moderate withdrawal rates. The curves usually seem to peak around 60/40 give or take a couple of 10's.

I don't agree that when considering probablility of failure that 92% is much more than 85%, or even more at all. This kind of study has a significant range of uncertainty. I don't have an estimate for it, but I really would never imagine that those two numbers are even different withing the range of uncertainty. It is nothing like falling to maybe less than 50% success for the all bond portfolio, at some withdrawal rates. There is also the concern that anything less than 100% is not safe enough. Who would invest for a lifetime on an 8% chance of running out of money before dying. Of course, that number needs to be modified by the chances of even being alive by that time. But these are old discussions, and Bernstein has his own well phrased objections about the whole thing in "Hell."

am wrote:Thought 80/20 has a better risk adjusted return, plus you can get some additional return from rebalancing.

I don't object to the risk of 100% stocks but the ability to rebalance outside equities has got to be worth something! Rebalancing is one of the cornerstones of the whole Bogle approach.

Rebalancing is about controlling risk. If you have chosen to be 100/0, you don't need to rebalance (though potentially between your various stock funds you might). Also, as you can see, there is nothing special about holding mostly stocks and some bonds. On the otherhand, it probably doesn't make sense to be 100% bonds.

SC Hoosier wrote:In their book "The Elements of Investing", one of them, not sure which, say that investors with high risk tolerance can be 100% equities up to 50 years old. I subscribe to this view as well. What are your thoughts?

If ZIRP continues on past 2015, I will be updating my IPS. Right now the IPS calls for my portfolio stock allocation pct. = 105 - age. I think that the inverting gurus who came up with the formulas that a lot of us employ never assumed ZIRP. I am currently at ~ 51% equity/49% bonds. I may be holding the equity pct. to be no lower than 50% for a few years. Bonds are not likely to provide more return going forward than their coupon rate if I have been reading this board correctly.

Mike

Avatar is a Japanese Cherry tree in Washington, DC during the peak cherry blossom time.

Aside from risk management (of course AA and rebalancing both control that), doesn't the rebalancing add an additional return due to the buy-low sell-high result? Or is that factored into these graphs?

As a young investor with income rising I am comfortable with 100% equities, but I maintain an 80/20 allocation because I don't want to miss out on rebalancing returns. Is this wrong? Do the returns of that extra 20% of equity override the rebalancing returns, even if bond yields are around the inflation rate?

Understanding that this comment (and a few previous ones) are off the OP topic,

I ran 6 simulations using different combinations of stocks (20% S&P 500, 30% large value, 50% mid/small value) and bonds (5YR T-Notes) using historical data from 1928-2012. With all due respect to MC simulation flaws (its not as bad as some make it out to be) and questions about past performance (although last 10 years of returns are almost identical to last 85), here is what we came up with when we modeled a 30yr retirement for someone with $1M wanting $40k per year adjusted for 3% inflation. % Survival is just a crude measure of how many "runs" out of 10,000 we ran out of money. "25th % wealth" is a bit more realistic worst-case scenario as it shows how your portfolio value could dwindle if you get a bad run of returns and don't change spending habits. Results:

100% Stocks% Survival = 88%25th % wealth = $3.6M

80% Stocks% Survival = 91%25th % wealth = $3.7M

60% Stocks% Survival = 95%25th % wealth = $3.4M

40% Stocks% Survival = 97%25th % wealth = $2.6M

20% Stocks% Survival = 98%25th % wealth = $1.4M

100% Bonds% Survival = 81%25th % wealth = $130K

Based on my calculations, less in stocks does reduce the risk of running out of money, but also dramatically increases the risk things get "dicey" later in life (at 20% in stocks, you start to go downhill pretty fast as rising income starts to eat into a static portfolio value).

For better or worse, I always anchor on a 60/40 for a retiree as it seems to offer the best combination of growth, stability, and low longevity risk. Some who wish to try to leave more to future generations will be more in stocks (up to 100%), others with low income goals and no desire for a bequest can afford to be a bit more conservative. I don't go overboard with 30% or 20% stock allocations, however -- 30 years is a long time and I don't want to lose purchasing power because I was so concerned with short-term stock declines. With bonds what they are today, those low-equity allocations are very risky for most.

Eric

Last edited by EDN on Fri Feb 08, 2013 1:04 pm, edited 1 time in total.

EDN wrote:For better or worse, I always anchor on a 60/40 for a retiree as it seems to offer the best combination of growth, stability, and low longevity risk. Some who wish to try to leave more to future generations will be more in stocks (up to 100%), others with low income goals and no desire for a bequest can afford to be a bit more conservative. I don't go overboard with 30% or 20% stock allocations, however -- 30 years is a long time and I don't want to lose purchasing power because I was so concerned with short-term stock declines. With bonds what they are today, those low-equity allocations are very risky for most.

Dogs wrote:Aside from risk management (of course AA and rebalancing both control that), doesn't the rebalancing add an additional return due to the buy-low sell-high result? Or is that factored into these graphs?

As a young investor with income rising I am comfortable with 100% equities, but I maintain an 80/20 allocation because I don't want to miss out on rebalancing returns. Is this wrong? Do the returns of that extra 20% of equity override the rebalancing returns, even if bond yields are around the inflation rate?

The rebalancing effects are indeed factored in. So yes I would say if your only reason for holding 80/20 is that you expected it actually gets higher return than 100/0 in a period where let's say stocks outperform bonds, yes you would likely be wrong.

Edit: I'm sorry that other graph is of average returns so the rebalancing effects would not really be factored in. Let me see if I can find with with the annualized return instead. Here's one with annualized returns from three different time periods. Either way, we see the same thing more or less.

dbr wrote:[Well, my actual comment was an objection to the idea that if you need income, you have to have bonds. I read that as the old "income = what interest your bonds pay out" fallacy, which is a sure way to push my buttons...

Sure.

The actual model that you are quoting is pretty much the general outcome of about all studies of the subject that show that 100% stocks is not quite as safe at moderate withdrawal rates. The curves usually seem to peak around 60/40 give or take a couple of 10's

Agreed. Quite consistent.

I don't agree that when considering probablility of failure that 92% is much more than 85%, or even more at all.

OK, good point. The real phonus balonus in all these studies is that the failure rate is exquisitely sensitive to even the tiniest changes in withdrawal rate. So, holding withdrawal rate constant and seeing the change in failure rate with portfolio composition is just plain wrong. (Yes, what I did above was just plain wrong). What one should do is hold failure rate constant and see what happens to withdrawal rate as a function of portfolio composition. When you do this, what you see is that the difference with portfolio composition are amazingly small, and are much smaller than the differences from one model to another.

You're strolling along a cliff walk, and people are arguing whether certain portfolios are putting you in the center or near one edge--but nobody knows how close the path is to the cliff, or how many washouts there are.

There is also the concern that anything less than 100% is not safe enough. Who would invest for a lifetime on an 8% chance of running out of money before dying.... But these are old discussions, and Bernstein has his own well phrased objections about the whole thing in "Hell."

Indeed. For those who haven't read it, drb is referring to The Retirement Calculator from Hell, Part III, which makes a really good point. But I don't agree with it entirely. It's too much like saying we shouldn't worry about airliner safety because the plane flight is already safer than the drive home.

staythecourse wrote:Nothing wrong at all with being heavy on equities. Period. The data supports it. Anyone saying anything else is suffering from recency bias.

I crunched the numbers of a heavy equity investor (80/20) vs. a defensive investor (50/50) over every 10, 15, 20 year period from 1926 to current. The data CLEARLY supports the equity heavy investor and only increases over the longer time horizons. In 10 year periods the 80/20 investor outperformed 80%+, in 15 years periods they outfperformed 85%+, and in 20 year periods they outperformed 95%+. Of course, folks out there will clamor about "what about risk??" The answer of WORST underperformance when it didn't outperform was 20% less returns in 10 year periods, 15% less returns in 15 year periods, and <5% in 20 year periods.

The data is the data. The job of every investor is to determine extrapolate that information for their personal situation. In my view of investing in general is: it is a matter of weighing PROBABILITIES vs. POSSIBILITIES. The probablities of success and REDUCING underperformances is with the equity heavy portfolios and only increases with increasing time horizons. THe possiblities of failure and crashing and burning is there, but that is not evenly remotely the likely possiblity. So, the question remains is do you invest based on high probabilities or the low possibilities. The former is using a rational approach and the latter is more emotional. Either is fine, but every investor has to answer that question themselves.

This does come with the caveat that any investor considering high equities: Have a recession resistant job (trust me not many folks fit into this), long time horizon, and no need for the liquidity of those $$ before the date of retirement.

Good luck.

and why would you exclude the oh so interesting data from 1901 to 1926?You know, where the market went basically nowhere?

15-25 year periods were the stock market goes "nowhere" are not uncommon. Happened from 1966-1982... We're 13 years into one now.

dbr wrote:The actual model that you are quoting is pretty much the general outcome of about all studies of the subject that show that 100% stocks is not quite as safe at moderate withdrawal rates. The curves usually seem to peak around 60/40 give or take a couple of 10's.

Wade Pfau showed on his blog a year or two ago that for a wide range (in tens of percentage points allocated to bonds) of stock/bond allocations the outcome is pretty much similar for a US based investor but for many other countries the "bond allocation band" is very, very narrow indeed.

My suggestion is that going forward perhaps this will not be the case for US based investors.

Dogs wrote:Aside from risk management (of course AA and rebalancing both control that), doesn't the rebalancing add an additional return due to the buy-low sell-high result? Or is that factored into these graphs?

As a young investor with income rising I am comfortable with 100% equities, but I maintain an 80/20 allocation because I don't want to miss out on rebalancing returns. Is this wrong? Do the returns of that extra 20% of equity override the rebalancing returns, even if bond yields are around the inflation rate?

There are lots of threads that talk about the rebalancing return. And there is a good paper from Vanguard.

In simple terms, in trending markets, the rebalancing return is negative. In mean-reverting markets, the rebalancing return is positive.

In this chart, the highest expected return on the efficient frontier is 100% stocks. Clearly 80% stocks has lower expected return than 100% stock.

Suppose you use a dynamic strategy like re-balancing where, instead of holding, you sell and buy, Maybe you will sell at the top just before a reversal and you can buy back in at a lower price. But if you are unlucky, the price will continue higher and you'll miss out on those gains.

Whether you get rebalancing bonus or penalty is all luck.

Last edited by grayfox on Fri Feb 08, 2013 2:21 pm, edited 1 time in total.

EDN wrote:For better or worse, I always anchor on a 60/40 for a retiree as it seems to offer the best combination of growth, stability, and low longevity risk. Some who wish to try to leave more to future generations will be more in stocks (up to 100%), others with low income goals and no desire for a bequest can afford to be a bit more conservative. I don't go overboard with 30% or 20% stock allocations, however -- 30 years is a long time and I don't want to lose purchasing power because I was so concerned with short-term stock declines. With bonds what they are today, those low-equity allocations are very risky for most.

Well, I don't know. If Vanguard thinks that just a 30% stock allocation (of larger growth stocks) in today's marketplace has the highest probability of supporting a 3 decade retirement that includes continually rising prices, especially for someone who wants to leave a larger-than-current nest egg, maybe so. My guess is Vanguard runs that fund first and foremost for ultra-low short-term volatility (what some retirees refer to as "risk"), and worries less about long-term real returns and the purchasing power of that income stream (what retirees should refer to as "risk").

EDN wrote:Well, I don't know. If Vanguard thinks that just a 30% stock allocation (of larger growth stocks) in today's marketplace has the highest probability of supporting a 3 decade retirement that includes continually rising prices, especially for someone who wants to leave a larger-than-current nest egg, maybe so. My guess is Vanguard runs that fund first and foremost for ultra-low short-term volatility (what some retirees refer to as "risk"), and worries less about long-term real returns and the purchasing power of that income stream (what retirees should refer to as "risk").

Eric

Leaving a nest egg is not the concern of myself and probably the majority of retirees. The Target Retirement Income fund is set up for Retirees looking to live on their Nest Egg. Purchasing Power of the Income Stream is also a concern of that Fund. These Funds were set up based loosely on the 'Rule of Thumb' Age in Bonds.

Apparently you think there is less risk for a retiree with a 60% allocation to stocks than a 30% allocation. I think you're wrong and so does Vanguard.

EDN wrote:Well, I don't know. If Vanguard thinks that just a 30% stock allocation (of larger growth stocks) in today's marketplace has the highest probability of supporting a 3 decade retirement that includes continually rising prices, especially for someone who wants to leave a larger-than-current nest egg, maybe so. My guess is Vanguard runs that fund first and foremost for ultra-low short-term volatility (what some retirees refer to as "risk"), and worries less about long-term real returns and the purchasing power of that income stream (what retirees should refer to as "risk").

Eric

Leaving a nest egg is not the concern of myself and probably the majority of retirees. The Target Retirement Income fund is set up for Retirees looking to live on their Nest Egg. Purchasing Power of the Income Stream is also a concern of that Fund. These Funds were set up based loosely on the 'Rule of Thumb' Age in Bonds.

Apparently you think there is less risk for a retiree with a 60% allocation to stocks than a 30% allocation. I think you're wrong and so does Vanguard.

There are two conflicting goals:

1) Leaving a "nest egg".2) Have enough for retirement goals, whatever they may be.

The above is confounded by various US based studies showing that stock/bond allocations pretty much does not matter for the outcome, based upon historical data.

Once again I refer to Wade Pfau research that at least various members of this board should not be that sure of them selves.

EDN wrote:Well, I don't know. If Vanguard thinks that just a 30% stock allocation (of larger growth stocks) in today's marketplace has the highest probability of supporting a 3 decade retirement that includes continually rising prices, especially for someone who wants to leave a larger-than-current nest egg, maybe so. My guess is Vanguard runs that fund first and foremost for ultra-low short-term volatility (what some retirees refer to as "risk"), and worries less about long-term real returns and the purchasing power of that income stream (what retirees should refer to as "risk").

Eric

Leaving a nest egg is not the concern of myself and probably the majority of retirees. The Target Retirement Income fund is set up for Retirees looking to live on their Nest Egg. Purchasing Power of the Income Stream is also a concern of that Fund. These Funds were set up based loosely on the 'Rule of Thumb' Age in Bonds.

Apparently you think there is less risk for a retiree with a 60% allocation to stocks than a 30% allocation. I think you're wrong and so does Vanguard.

Cutthroat,

There is nothing safe about having almost 75% of your portfolio in assets that are all but assured of underperforming or just matching inflation if your goal is to generate a reasonable (say 4%) withdrawal rate that includes a rising standard of living. That's just basic math. Not saying you or anyone else is doomed with the Vanguard fund because everyone's situation is different (almost all my clients want to leave $ to kids/charities, for example). Just saying, simple return vs requirement calculation will tell you if your portfolio (or the vast majority of it) has almost no chance of earning the return you need to be successful, you are taking too much risk.

Eric

PS--most retirees absolutely do want to leave behind a nest egg, the contrary seems to be popular here but very atypical in my experience

EDN wrote:Well, I don't know. If Vanguard thinks that just a 30% stock allocation (of larger growth stocks) in today's marketplace has the highest probability of supporting a 3 decade retirement that includes continually rising prices, especially for someone who wants to leave a larger-than-current nest egg, maybe so. My guess is Vanguard runs that fund first and foremost for ultra-low short-term volatility (what some retirees refer to as "risk"), and worries less about long-term real returns and the purchasing power of that income stream (what retirees should refer to as "risk").

Eric

Leaving a nest egg is not the concern of myself and probably the majority of retirees. The Target Retirement Income fund is set up for Retirees looking to live on their Nest Egg. Purchasing Power of the

There are two conflicting goals:

1) Leaving a "nest egg".2) Have enough for retirement goals, whatever they may be.

The above is confounded by various US based studies showing that stock/bond allocations pretty much does not matter for the outcome, based upon historical data.

Once again I refer to Wade Pfau research that at least various members of this board should not be that sure of them selves.

I don't get that much from Wade's research, but if he says any stock/bond mix is about the same, that's just not true. And the more balanced the equity allocation and the more you consider current bond market characteristics, the less that is the case.

a) The actual meaning of "nest egg" is an egg that a farmer puts in a hen's nest to encourage her to accept it as an appropriate place to lay eggs. I have never been able to figure out how you get from there to an investing analogy. Our kids set up a 529 account for our new grandchild, and maybe the contribution we made to it is a nest egg, since part of its purpose is to encourage his parents to add more.

It can also mean not taking every last one of a bird's eggs, but leaving one "nest egg" to keep the hen happy;

or, it can mean a fake egg left in place of the real one the farmer has removed, in order to keep the hen ignorant of the calamitous theft that has been made. I don't even want to think of an investing analogy for those last two meanings.

b) For a legacy to be left to one's children, perhaps one could use "paralyzed nest insects," which are what a sphex wasp leaves in its nest to nourish its newly-hatched young. Samuel Butler wrote:

Why should the generations overlap one another at all? Why cannot we be buried as eggs in neat little cells with ten or twenty thousand pounds each wrapped round us in Bank of England notes, and wake up, as the sphex wasp does, to find that its papa and mamma have not only left ample provision at its elbow, but have been eaten by sparrows some weeks before it began to live consciously on its own account?

EDN wrote:There is nothing safe about having almost 75% of your portfolio in assets that are all but assured of underperforming or just matching inflation if your goal is to generate a reasonable (say 4%) withdrawal rate that includes a rising standard of living. That's just basic math. Not saying you or anyone else is doomed with the Vanguard fund because everyone's situation is different (almost all my clients want to leave $ to kids/charities, for example). Just saying, simple return vs requirement calculation will tell you if your portfolio (or the vast majority of it) has almost no chance of earning the return you need to be successful, you are taking too much risk.

Eric

PS--most retirees absolutely do want to leave behind a nest egg, the contrary seems to be popular here but very atypical in my experience

Yeah, It's 'basic Math' if you can predict the Future !

Oh, but there is safety in a Portfolio that is 75% is assets matching inflation! Remember that the 4% is a 'Worst Case' Historical withdrawal rate. Just matching Inflation and Not Losing Principal will satisfy this withdrawal rate perfectly. The 4% SWR factors in inflation already. What you don't seem to understand is the Sequence of Returns in a Retirees period of withdrawal. If a given Retiree has a Nest Egg Large enough to support his Withdrawal Rate, why put up with volatility? The retiree has already won the game, why take the risk? What you have to understand is 'Not Losing Money is more Important than the Chance of Growth.

I find it incredulous that not one entity mentioned their potential risk of loss of an existing portfolio. Every allocation can be broken down to a number that (pretty much) indicates how much an average loss might be with a one standard deviation. There is no such thing as a 'conservative, moderate, aggressive' portfolio in the industry since there are no standards at all. See client questionnaire for any broker dealer firm. Or Vanguard, Fidelity.

Probably even worse is all this effort for backtesting, reversion and on and on and not one focus towards the economics for 2000, 2008 or now. If someone knew how to crank out all these numbers and articulate the future based from the age of dinosaurs or whatever, then there was more than enough IQ to address the economic signals for the last two debacles. They included the inverted yield curve then and the GDP now.

The military has plans for an offensive and also for a retreat. You do not retreat after you have been slaughtered- you gage the risk and backoff as necessary. Investors have never been taught risk (risk of loss) so they tend to rely on superfluous number crunching of what happened many yesterdays ago in the hopes it will validate their own inaction.

efmoody wrote:I find it incredulous that not one entity mentioned their potential risk of loss of an existing portfolio. Every allocation can be broken down to a number that (pretty much) indicates how much an average loss might be with a one standard deviation. There is no such thing as a 'conservative, moderate, aggressive' portfolio in the industry since there are no standards at all. See client questionnaire for any broker dealer firm. Or Vanguard, Fidelity.

Probably even worse is all this effort for backtesting, reversion and on and on and not one focus towards the economics for 2000, 2008 or now. If someone knew how to crank out all these numbers and articulate the future based from the age of dinosaurs or whatever, then there was more than enough IQ to address the economic signals for the last two debacles. They included the inverted yield curve then and the GDP now.

The military has plans for an offensive and also for a retreat. You do not retreat after you have been slaughtered- you gage the risk and backoff as necessary. Investors have never been taught risk (risk of loss) so they tend to rely on superfluous number crunching of what happened many yesterdays ago in the hopes it will validate their own inaction.

Cut-Throat wrote:Yeah, It's 'basic Math' if you can predict the Future !

Oh, but there is safety in a Portfolio that is 75% is assets matching inflation! Remember that the 4% is a 'Worst Case' Historical withdrawal rate. Just matching Inflation and Not Losing Principal will satisfy this withdrawal rate perfectly. The 4% SWR factors in inflation already. What you don't seem to understand is the Sequence of Returns in a Retirees period of withdrawal. If a given Retiree has a Nest Egg Large enough to support his Withdrawal Rate, why put up with volatility? The retiree has already won the game, why take the risk? What you have to understand is 'Not Losing Money is more Important than the Chance of Growth.

How old are you Sonny ?

Wow, that is condescending. What does my age/experience have to do with the content of my comments? I suppose you'd feel better if I was, say, a CFA charterholder, or owned and managed a fee-only RIA devoted exclusively to retirement planning and portfolio management?

Needless to say, I totally agree with Eric on this one. Vanguard's Target Retirement Funds are set up to offer very conservative investors a low volatility path. They do not aim at or claim to optimize performance. Short term volatility may provoke anxiety in investors, but a steady path of diminishing assets over 30 or 40 years may present a problem way down the road that is a whole lot worse, running out of money. Who knows how long they'll live? NO ONE. Who knows now what will be the full cost in inflated dollars of their medical care, retirement home care, and nursing home care over the next 30 or 40 years? Answer: NO ONE. If you do run out of money at that point in life you have no options, no way to make it up. So in my opinion the risk of not having at least 50% in stocks is greater than the risk of stock volatility. Especially now after suffering through 13 years of secular bear market in stocks, which, ironically, makes expected returns over the next decade of two higher in contrast to bonds which have been in an unprecedented 31 year bull market which is likely to be close to its inflection point and therefore does not forecast expected returns at historical norms.

Eric, I note that you "anchor" your retired clients "60/40". As I posted above, this allocation actually out-performed 100% stocks over the past 12 years (not surprising, given the turmoil early in the oughts). But I guess what confuses me is the meaning of "anchor". Do you advise that a certain portion of a retirement portfolio be "anchored" at 60/40? If so, how much?

Mind you, in a roundabout way, this is (sorta, kinda) what my wife and I do, if I understand your term. My wife is still working (her choice; I am retired) and her 401K (contribs and balance) are 60/40. Her IRA with Vanguard from a prior employer is actually a tad more aggressive, at 65/35. She has dribs and drabs of other stuff, but overall, her AA is pretty darn close to your "anchor". With Social Security and her pension (which just kicked in), plus a 4% withdrawal from her "stuff" alone, we could make do. Wouldn't be fancy, but we could make ends meet.

My stuff (TIRA/SEP-IRA/other investments) is waaaay conservative, and is closer to an AA of 30/70, with a decided tilt to IRA CDs (in a ladder). I'm less concerned about inflation here, although the CD ladder has actually done quite well in that regard. We plan to use interest and dividends (only) from "my stuff" to augment the income streams noted above.

I sleep better knowing, if all else fails, Mr. Market does a Japan on us, the doom-sayers are right about asset deflation, you name it, we'll be just fine. Black-swan prepping, as it were.

Last edited by john94549 on Fri Feb 08, 2013 8:49 pm, edited 1 time in total.

Nothing wrong at all with being heavy on equities. Period. The data supports it. Anyone saying anything else is suffering from recency bias.

I crunched the numbers of a heavy equity investor (80/20) vs. a defensive investor (50/50) over every 10, 15, 20 year period from 1926 to current. The data CLEARLY supports the equity heavy investor and only increases over the longer time horizons. In 10 year periods the 80/20 investor outperformed 80%+, in 15 years periods they outfperformed 85%+, and in 20 year periods they outperformed 95%+. Of course, folks out there will clamor about "what about risk??" The answer of WORST underperformance when it didn't outperform was 20% less returns in 10 year periods, 15% less returns in 15 year periods, and <5% in 20 year periods.

The data is the data. The job of every investor is to determine extrapolate that information for their personal situation. In my view of investing in general is: it is a matter of weighing PROBABILITIES vs. POSSIBILITIES. The probablities of success and REDUCING underperformances is with the equity heavy portfolios and only increases with increasing time horizons. THe possiblities of failure and crashing and burning is there, but that is not evenly remotely the likely possiblity. So, the question remains is do you invest based on high probabilities or the low possibilities. The former is using a rational approach and the latter is more emotional. Either is fine, but every investor has to answer that question themselves.

This does come with the caveat that any investor considering high equities: Have a recession resistant job (trust me not many folks fit into this), long time horizon, and no need for the liquidity of those $$ before the date of retirement.

Yes, the data is the data and it works out for most of the people most of the time. If you could play forever that would be the way to bet.

The problem is that since your horizon isn't unlimited and you don't know when the black swan event is going to show up in your life and force you to retire and start spending the funds, a balanced approach is more appropriate. The consequences of a bad result should overwhelm the probability of a good result and encourage caution. That's why I pay for life insurance, health insurance, homeowner's insurance, etc. The insurance company manages by spreading the risk across all their customers has the law of large numbers working for them, an individual does not have that option. Pension funds have a similar advantage over IRAs/401(k), a particular individual may do better but a large number of individuals will do worse. I only get to run my lifetime investing experiment once, so a conservative approach is more appropriate.

Don't kid yourself that you've got absolute control over your investing horizon or working life. Any of us could be disabled tomorrow so that we couldn't work. The only ways for an individual to manage risk is maintaining a low debt level, use insurance, and diversifying across asset classes. I guess you could get Warren Buffett rich early and then not worry about it but that boat has passed for me.

A balanced more conservative approach doesn't maximize your potential return, but it minimizes the odds of an absolutely unacceptable result.

100% equities is perfectly reasonable for an investor in the accumulation phase. In fact, the optimal allocation is >100% for young investors (I.e. leveraged). High volatility works to your advantage as an accumulator. The risk-dampening characteristics of periodic investing over a lifetime (vs a lump sum investment up front) makes this possible. The real risk is actually your own (mis)behavior / panic selling, which isn't an issue if you're a Boglehead. See William Bernstein's book The Ages of the Investor.

john94549 wrote:Eric, I note that you "anchor" your retired clients "60/40". As I posted above, this allocation actually out-performed 100% stocks over the past 12 years (not surprising, given the turmoil early in the oughts). But I guess what confuses me is the meaning of "anchor". Do you advise that a certain portion of a retirement portfolio be "anchored" at 60/40? If so, how much?

Mind you, in a roundabout way, this is (sorta, kinda) what my wife and I do, if I understand your term. My wife is still working (her choice; I am retired) and her 401K (contribs and balance) are 60/40. Her IRA with Vanguard from a prior employer is actually a tad more aggressive, at 65/35. She has dribs and drabs of other stuff, but overall, her AA is pretty darn close to your "anchor". With Social Security and her pension (which just kicked in), plus a 4% withdrawal from her "stuff" alone, we could make do. Wouldn't be fancy, but we could make ends meet.

My stuff (TIRA/SEP-IRA/other investments) is waaaay conservative, and is closer to an AA of 30/70, with a decided tilt to IRA CDs (in a ladder). I'm less concerned about inflation here, although the CD ladder has actually done quite well in that regard. We plan to use interest and dividends (only) from "my stuff" to augment the income streams noted above.

I sleep better knowing, if all else fails, Mr. Market does a Japan on us, the doom-sayers are right about asset deflation, you name it, we'll be just fine. Black-swan prepping, as it were.

Hey John,

Maybe "anchor" isn't a good word. What I mean is, 60/40 is sort of a starting point for me when I meet with someone new and am thinking about what my recommendations will be -- 60/40 seems to work well for a wide variety of what I think are "typical retirees" (a 3 decade retirement wishing for about 4% per year and the desire to leave portfolio to next generation). Less in stocks if they don't need as much income or don't have any legacy goals. More in stocks is they put a greater emphasis on growing the bequest.

I find it helpful to start somewhere and adjust upward/downward according to objectives than be all over the map or start with all-bonds and always work up to a better mix.

I do the same with <50 year olds (but 80/20) and <40 year olds (but 100/0).

Well, I don't know. If Vanguard thinks that just a 30% stock allocation (of larger growth stocks) in today's marketplace has the highest probability of supporting a 3 decade retirement that includes continually rising prices, especially for someone who wants to leave a larger-than-current nest egg, maybe so.

There are 2 pages of discussion mostly centered on assumptions made based on historical numbers - and my position is quite clear on this... heck my signature says it all, so I don't care to proliferate that sort of conversation.

Instead, I want to show how as lenghty threads with lenghty posts go on, erroneous statements go unnoticed and not corrected.

Vanguard's target retirement offerings assume "retirement" at 65 and provide options for savers/investors as early as 18-19 year olds with about 47 years (TR 2060) to retirement. Up to 27 years to retirement (TR 2040), or 38 years old, ALL offerings are designed by Vanguard with a 90/10 Equity/Fixed split; then, progressively reduce investment in Equities over the NEXT ~ 27 years. Now, TR Income - or 30% Equity allocation as posted by Cut-Throat - is intended for those savers/investors whom have been about 5 years in retirement (about 70 yo).https://personal.vanguard.com/us/whatwe ... tWT.srch=1

Maybe "anchor" isn't a good word. What I mean is, 60/40 is sort of a starting point for me when I meet with someone new and am thinking about what my recommendations will be -- 60/40 seems to work well for a wide variety of what I think are "typical retirees" (a 3 decade retirement wishing for about 4% per year and the desire to leave portfolio to next generation). Less in stocks if they don't need as much income or don't have any legacy goals. More in stocks is they put a greater emphasis on growing the bequest.

I find it helpful to start somewhere and adjust upward/downward according to objectives than be all over the map or start with all-bonds and always work up to a better mix.

Just to be perfectly clear. By "typical retiree" and "3-decade retirement" I assume you mean about age 65? If so, is this an accurate statement: "When I meet with someone new, my starting point for discussion is a stock allocation that is more aggressive than Morningstar's aggressive model glide path, and I adjust downward or upward from there?"

That is, is it factually accurate to say you start the discussion by suggesting a stock allocation that is 20% more of the portfolio than Morningstar's "moderate" allocation?

(ok ... I data mined ... LTT did great during this period ... I excluded emerging markets which did great ... who knows the future, both these assets will probably do worse in the next 41 years than the last 41 years ... particularly LTT ... again, who knows) ... that said, the risk reduction from bonds is likely to stay

Also, how did a thread on 0 percent bonds for those under 50 lead to a discussion on 0 bonds in retirement?

steve r wrote:Also, how did a thread on 0 percent bonds for those under 50 lead to a discussion on 0 bonds in retirement?

Stay diversified ....

Also, there are ways of insuring your portfolio survives in retirement, without increasing your allocation to stocks. (Which is increasing Risk; Suddenly a lot of folks see Stocks as an almost Risk Free Investment. Want a Higher Withdrawal Rate and Leave a Portfolio Legacy ? Simple, Just increase your stock allocation!)

How? Withdraw less.

FireCalc says that 3.5% is a 100% HSWR for a portfolio that has only 30% stocks for a 30 year period. Since 3% is plenty of Money for me in retirement (More than I spend). I take 3% of remaining portfolio balance, which is an even more conservative approach.....If the Portfolio does well, I may increase my WR percentage as I age. If I increase my Allocation to stocks to 60%, FireCalc say my 100% HSWR is now 3.7% .....BFD !